Gates Foundation: Lessons Learned About Payments Systems

The Level One Project Guide: Designing a New System for Financial Inclusion. Photo: Gates Foundation

The Gates Foundation recently published a comprehensive report on designing payments systems for financial inclusion called The Level One Project Guide.

Developed over 18 months as part of their Financial Services for the Poor initiative, the findings are the results of discussions and engagements with hundreds of stakeholders in over 25 countries around the world but also the specific experiences of places like Mexico, Peru, and Australia that have worked to rethink and re-engineer their national retail payment systems.

Arguably, closed-loop systems may be easier to start, but cause the provider to have to compete across an end-to-end range of services, some of which may not be optimized. These systems are less useful to people and businesses in an inclusive digital financial economy than open-loop systems.

Real-time settlement practices decrease risk

Given that underlying transactions are being delivered in near-real time, it is clearly optimal that the net settlement between participants relating to these transactions also be done either in near-real time, or at a minimum, on a same-day basis

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A settlement process that minimizes participant risk opens the door for new types of participants and innovators to be included—including those interested in serving the poor.

Real-time push payments provide convenience and better fraud control

The authentication of the payer happens immediately with the party that knows the payer best, reducing the potential for fraud and the embedded costs related to managing this risk. The result is that push payments have less risk and are less expensive for providers.

International standards and open APIs lower the costs of innovation and access

In recent years, it has become obvious that the use of international standards (such as ISO 20022) is better than system-specific, proprietary standards, as it allows for easier handling of transactions being passed out of the domestic system and into international systems.

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On top of established standards, newer systems are exposing system functionality via APIs to direct participants and other service providers. This enables multiple providers and vendors to easily embed payment capability in their sector-specific services. The use of open APIs encourages innovation, particularly by secondary service providers, and drives down total system costs and/or increases functionality.

The report also addresses the new distributed payment technologies that could create a means of “making payments and transferring money without financial intermediaries” and could be “used to move digital assets of all kinds, including fiat currencies.”